Nuverra Environmental Solutions, Inc.
Q2 2019 Earnings Call Transcript

Published: 7 Aug 2019

[Robert Kennedy:]

Good morning, and welcome to the Nuverra Environmental Solutions Second Quarter 2019 Call. This call is being recorded and will be available for the next 30 days on the Company website at nuverra.com. [Operator Instructions]My name is Robert Kennedy, Vice President of Finance and Treasurer. Joining me today on the call are Charlie Thompson, Chairman and CEO; Robert Fox, Chief Operating Officer; and Stacy Hilgendorf, Chief Financial Officer.Today's presentation will contain forward-looking statements about our expected financial results and operational performance. These statements involve risks and uncertainties that could cause actual results to differ from our expectations. Potential risk factors that could cause these differences are described in our SEC filings, which may be obtained by visiting the Investor Relations section of our website.All information provided on this call is as of today, August 6, 2019, and Nuverra undertakes no duty to update or revise this information.Today's discussion will also include certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of our non-GAAP measures to the most closely related GAAP results can be found in the tables attached to our press release announcing financial results for the quarter.With that, I will turn the call over to Charlie.

[Charlie Thompson:]

Thanks, Robert. Welcome to the Nuverra Environmental Solutions Second Quarter Earnings Conference Call. Slightly over a year ago, we made executive changes at Nuverra. I wanted to take the opportunity in the context of our earnings release to discuss some of the things we have done and some of the things we are working on.First and foremost, with more than 700 people at the company, we've implemented clear organizational structures, consistent payment programs and individual job descriptions and responsibilities to get the most out of the best people at the company. We have eliminated our loss through attrition more than 15 management-level executives. We have lowered costs as a result and promoted deserving people throughout the organization.We have a new COO, CFO, Head of Sales in the Rocky Mountain region and in the Northeast. We have a clearly articulated and relatively simple bonus program and have established employee-grade levels throughout the whole company. We have adjusted salaries and implemented raises across the company. We have defined clear KPIs for each of the business units and communicated those goals deep into the organization.We are working to have employees informed, engaged and motivated. We have made progress, but there's work to be done. We have called assets in businesses that were underperforming and not part of the core service offering. We shut down our Eagle Ford business, our construction services business and have sold a meaningful amount of non-core assets, including rental equipment, trucks and real estate.We have generated proceeds of $23.1 million since January 1, 2018. We have invested new capital in the business by adding, before the end of the third quarter, 48 new power units, modified 24 trucks to increase hauling capacity and upgraded a handful of disposal wells to increase our disposal capacity.These actions make us more competitive in our markets, improve our profile with customers and increase the morale of our employees. We’ve implemented a number of technology initiatives and related organizational changes to make our transaction processes more efficient. Highest on that list is the centralization of dispatch operations in the Rocky Mountains and adoption of a new dispatch software technology, which is in the process of being rolled out to the whole company.These changes aren't without challenges and disruption, but we can better and more efficiently plan work, monitor profitability and eliminate mistakes. We are also participating in a number of blockchain development projects with some of our largest customers that, while early in the process, have the potential to reduce our back-office paperwork and the associated costs, time and effort.Ultimately, these projects should benefit our working capital. On the customer front, we are diversifying our customer base in the Northeast, developing new strategies to better serve our top 10 customers in the Rocky Mountain region, terminating activity with certain customers that is unprofitable, offering multiple complementary services for customers to strengthen relationships, developing more comprehensive calling plans for important customers and motivating salespeople to cross-sell our services which had historically operated independently.The results Stacy will discuss show signs of these efforts. G&A costs are down regionally and at the corporate level. Revenues are many, but not all of our business lines are up quarter-over-quarter, and gross operating margins have improved. We have done this while investing in the business, maintaining a stable amount of liquidity, improving our DSO metrics and maintaining a conservative leverage ratio. We have work to do on all of these fronts and are focused on our footprint in certain bases, fuel costs, repair and maintenance costs, overall corporate costs and our safety record and processes.At the same time, we are regularly evaluating strategic plans to create scale, improve our market presence and customer value proposition and strengthen our financial position. We operate in a very competitive market where customers are under pressure to cut costs and activity is slowing.So while it's important to discuss the efforts we are making, I acknowledge there is more to do to translate these initiatives into better financial results. All of us at Nuverra are focused on these goals, and we are regularly improving on the small and not-so-small things we can do to achieve greater success. Let me turn the call over to Stacy to discuss our results for the quarter.

[Stacy Hilgendorf:]

Thank you, Charlie, and good morning, everyone. I'd like to walk through several key financial metrics and provide some additional details of our second quarter performance. Top line results were up 6.1% sequentially from the first quarter primarily due to stronger completion activity in the Bakken, which drove increased third-party trucking volumes.Disposal, rental and landfill activities also enjoyed some improvement from the first quarter as a result of better weather and more activity in the areas in which we operate. However, revenues were down versus the same quarter a year ago due to fewer freshwater and flowback jobs in the second quarter of 2019 and increased competition in the lay flat temporary hose business.Overall, total revenue was $45.2 million in the second quarter of 2019 compared to $48.9 million in the same period a year ago, a decrease of 7.6%. This revenue decrease was mainly due to challenges in our lay flat hose business, which has seen multiple new entrants in 2019.Overall, total cost as a percentage of revenues decreased this quarter compared to the same quarter last year across all of our reported expense lines, which resulted in improved operating margins, reflecting our ongoing and successful efforts to take fixed cost out of the business without sacrificing high-service quality or safety.Revenue in our Rocky Mountain internal trucking operations were up 3.7% compared to the second quarter of 2018, but down about 17% in our smaller and lower margin third-party trucking business, which typically handles the less predictable freshwater and flow back work.Partially offsetting the lay flat and trucking revenue decreases were strong year-over-year increases in our Bakken disposal, rental and landfill businesses. These increases suggest we've had success in demonstrating the benefits of our compressive service offerings to our customers in this region.In the Northeast division, our fourth quarter 2018 acquisition of three new disposal wells drove year-over-year revenue improvement of 11.6%. Disposal revenue in the Northeast in the second quarter of 2019 more than tripled from the second quarter of 2018.At the same time, trucking revenue in those periods was down 11.1% due to the industry trend toward reuse of frac water in the region as opposed to the traditional disposal methods. We continue to see less disposal activity overall as well as shorter hauling distances on the trucking side as a result of the reuse of produced water and well completions. In the Southern division, the significant reduction of disposal volumes from a key pipeline customer was the primary cause of the 10.5% decrease in overall revenues in this division in the second quarter of 2019 from the second quarter of 2018.We have been successful replacing much of this lost volume with new customers and expanding volume from existing customers. While this tradeoff has caused some pricing pressure, we note the resulting diversification of our customer base has benefited our credit risk concentration in the region. Revenue from our lower-margin trucking business in the Southern division was down 32.1% in the quarter year-over-year primarily as a result of pricing pressure from increased competition in the region.From a macro perspective, rig counts are up 1% over the prior year in the basins in which we operate, and the number of wells completed in the quarter versus the prior year in those areas has increased by 5%. Oil production volumes on an average barrels per day basis are up 14%, while gas production measured in cubic feet per day is up 19% in the basins in which we operate.Nuverra realized lower direct operating costs in the second quarter of 2019 compared with the same quarter of 2018 on a total dollar basis and as a percentage of revenues. This dollar basis decrease was primarily due to lower activity levels overall. However, the improvement as a percentage of revenues is a result of favorable service mix due to performing more higher-margin work and the active cost-reduction efforts during the past year I mentioned previously.As a result, gross profit, excluding special items, which also excludes depreciation and impairment and other noncash costs, increased 215 basis points from $9.6 million in the second quarter of 2018 to $9.9 million in the second quarter of 2019. Driver hiring and retention continues to be crucial to the success of our business, and we continue to focus resources on this in the coming quarters, including optimizing route planning to improve driver efficiency and changes to our recruiting strategy to ensure competitive compensation offerings.As of June 30, Nuverra had 336 drivers employed, which is down slightly as compared to the end of last quarter, but up overall from a year ago. G&A expense, excluding special items, during the second quarter of 2019 was $4.7 million, a reduction of almost $1 million or 16.7% as compared to the same period in 2018. The reduction was primarily due to compensation costs and professional fees resulting from cost savings initiatives.G&A adjusted for special items is also down slightly versus the first quarter of 2019, an indication that our overhead reduction strategies are ongoing and sustainable. The company's net loss for the second quarter of 2019 was $5 million as compared to a net loss of $11.2 million in the same period of the prior year.When adjusted for special items, the net loss was $5.3 million in the second quarter of 2018 versus $9.0 million in the second quarter of 2018. The primary driver for the improvement was due to higher depreciation expense in early 2018 due to fresh start accounting adjustments from our 2017 reorganization as well as the reduction in operating expenses in the current period discussed previously.Second quarter adjusted EBITDA was $5.3 million versus $4.1 million in the first quarter of 2018. Adjusted EBITDA margin increased by 324 basis points. The improvement was primarily driven by the Clearwater acquisition, the realization of cost savings and the benefit of favorable product mix due to performing more higher-margin work.Turning now to other financial measures. The company has continued its disciplined capital spending to support its refocused strategic plans. Cash paid for CapEx is $1.4 million in the second quarter compared to $3.6 million in the first quarter of 2019. Additionally, approximately $2.7 million of assets were acquired in the second quarter of 2019 through finance leases. The bulk of the capital expenditures were related to investments in our fleet and improving disposal capacity.We expect to continue strategically investing in our core assets in the coming quarters. Total liquidity available for operating needs, capital spending and other purposes at June 30, 2019, was $22.6 million. This consisted of $16.9 million of cash and revolver availability and $5.7 million of delayed draw borrowing capacity under our second lien term loan. Although our delayed draw facility is set to expire during the third quarter of 2019, we do not plan to renew the delayed draw loan facility and note that we have never drawn on this availability.Interest expense for the second quarter of 2019 was $1.3 million as compared to $1.2 million in the same period a year ago. We ended the period with total debt of $37.1 million versus $36.3 million at the close of the first quarter of 2019. Included in this balance is approximately $4.5 million for new finance leases for the acquisition of new heavy-duty trucks.Our weighted average interest rate on the successor facilities was approximately 10%. Total debt-to-adjusted EBITDA for the last 12 months was 1.7x when adjusted for acquisition and divestiture activity on a pro forma basis. We believe we can continue to grow the business and maintain low financial leverage. First quarter days sales outstanding was 57 days, down three days from last quarter. With Nuverra's focus on strategic investment, customer service and safe and efficient operations, the company is well positioned to execute its strategy and take advantage of new opportunities throughout the remainder of 2019.Thank you. We will now open the call for questions.

[Charlie Thompson:]

Okay. Great. It doesn't seem like there are any questions that will come up. Give it another second. But if there aren't any questions, thanks, everybody, for their time. We're available for questions independently and we'll talk to you at the end of the third quarter. Thanks very much.